Factors Affecting Personal Loan Eligibility in India

Can two people with a similar income be offered different personal loans? Well, the income level is not the only criterion for determining eligibility. Even though it is one of the important factors, lenders also consider an applicant's credit history, existing EMIs, job stability or business, the amount of loan desired, and ability to repay. Therefore, salary is not the sole criterion for securing a personal loan.

Personal loans' eligibility criteria are the requirements set by the lender to determine if an applicant can pay back the desired amount. The criteria can differ from lender to lender; hence, it is crucial to know them before submitting the application.

1. Credit Score and Payment History

Credit score is a very important factor for lenders in evaluating a borrower's credit history. The CIBIL score in India varies between 300 and 900 and is derived from the information in the CIBIL report. The report provides information about various credit accounts, the way they have been repaid, and the inquiries made. [1][2]

A credit score is helpful in securing a loan, but it does not mean that the application will be approved. Lenders take into account many more criteria that they have in terms of eligibility and underwriting.

Payment history is another important factor. Not paying or paying late on existing loans and credit cards can negatively affect a credit profile. Applicants can access their credit report beforehand to ensure that their accounts do not contain inaccurate information.

2. Income and Employment Stability

Lenders evaluate the borrowers' repayment capacity based on their income status. In this regard, lenders will analyse the amount of income, the frequency of cash inflow, employment details, business income, among others. [3]

For salaried individuals, aspects of regular employment status and steady income records will be taken into account. In the case of self-employed individuals, they may be required to submit relevant business/income proof as per the lender's norms.

Importantly, it is not only an applicant's earnings that matter, but also the amount of income left after paying existing obligations.

3. Existing EMIs and Other Debts

Current obligations can also limit an individual’s eligibility for a personal loan. For instance, two individuals may earn the same income but differ in terms of repayment capacity if one has high debt obligations while the other is not burdened with EMIs.

Lenders use the debt-to-income ratio or similar methods to find out how much of the applicant’s income is already spent on debt payments. The acceptance criteria and method of assessment can be different for each lender. [4]

Before applying, calculate your current EMIs and see if they fit your monthly income and expenses. This will help you determine whether you can afford another payment.

4. Loan Amount and Repayment Tenure

The amount that is going to be borrowed and the tenure that is chosen will affect the total EMI amount. It is simple to understand that if the amount of the loan becomes more, then the amount to repay also increases in case of a longer period chosen for repayment as well.[5]

For example, a person may be capable of managing a certain amount in case of a long loan period selected for repayment, but it may fail to repay the same amount in the case of a shorter loan period with a higher EMI amount.

Utilising an EMI calculator prior to submitting a request may allow individuals to determine differing amounts and terms of potential loans.

The result one comes up with should just be regarded as an indicative value, as the actual figures depend on the individual lender and on the applicant profile.

5. New Credit Applications

When individuals apply for credit, lenders may check the credit report of an applicant. If a person applies for several loans in a short time, many inquiries will show up in their credit history, and this fact will be taken into consideration during the credit assessment. [2]

Borrowing individuals obtaining information about their own credit score and lenders checking it live are two different processes.

In case one loan application was turned down, it may be reasonable to understand the reasons prior to making several credit applications. Having a look at the credit report and obligations under already existing loans may give an insight into this issue.

FynnEdge also explains some common factors behind loan rejection in its guide on why a loan gets rejected and how to address common issues.

6. Information and documents provided in the application

Lenders need to verify the information submitted by applicants before making a lending decision. Incomplete documents, incorrect personal information or differences between the application and supporting records can make the verification process more difficult.

The exact documentation can vary depending on the lender and the applicant's employment or business circumstances.

Before submitting an application, check that your personal details, income information, employment or business details and existing loan obligations are complete and consistent.

How can you assess your readiness to apply?

Before applying for a personal loan, you can carry out four practical checks:

1. Review your credit report and look for incorrect information, overdue payments or unfamiliar credit accounts.

2. Add up your existing EMIs and compare them with your regular income and essential monthly expenses.

3. Calculate the estimated EMI for the amount you actually need and compare different repayment tenures.

4. Read the complete loan terms, including interest, fees, charges and total repayment amount, before accepting an offer.

You can begin by checking your free credit score and then estimate your repayment using FynnEdge's Personal Loan EMI Calculator.

Personal loan eligibility and affordability are not the same. A lender may find an applicant eligible under its criteria, but the applicant should also consider whether the repayment remains manageable throughout the loan tenure.

Frequently asked questions

Does a good CIBIL Score guarantee personal loan approval?

No. A good CIBIL Score can be one factor in a loan assessment, but lenders may also consider income, employment, existing debt, repayment capacity and their own lending criteria. [1][3]

Can I get a personal loan if I already have an EMI?

Having an existing EMI does not automatically make an applicant ineligible. The lender may assess whether the applicant has sufficient repayment capacity for both the existing obligations and the proposed personal loan EMI. [4]

Does checking my own CIBIL Score reduce my credit score?

Checking your own CIBIL Score is different from a credit enquiry made by a lender while evaluating a loan application. A self-check is not the same type of enquiry as a lender's credit application enquiry. [2]

Does salary alone determine personal loan eligibility?

No. Income is one factor, but lenders may also consider credit history, existing debt, employment or business details, requested loan amount, repayment capacity and other information provided during the application.

Can existing loans affect personal loan eligibility?

Yes. Existing loans can affect repayment capacity because their EMIs already use part of the applicant's income. The effect depends on the applicant's overall financial position and the lender's assessment criteria.

How can I estimate my personal loan EMI before applying?

You can use a personal loan EMI calculator by entering the expected loan amount, interest rate and repayment tenure. FynnEdge provides a Personal Loan EMI Calculator for this purpose.

Sources

1. TransUnion CIBIL — CIBIL Score and Credit Information
   TransUnion CIBIL — Official information on CIBIL Scores, credit information and credit assessment.

2. TransUnion CIBIL — Credit Monitoring and CIBIL Score
   TransUnion CIBIL Newsroom — Provides information on the CIBIL Score range of 300–900 and related credit-score information.

3. Reserve Bank of India — Guidelines on Fair Practices Code for Lenders
   RBI — Fair Practices Code for Lenders — Covers proper assessment of credit applications and disclosure of loan terms and conditions.

4. Consumer Financial Protection Bureau — Debt-to-Income Ratio
   CFPB — What is a Debt-to-Income Ratio? — Explains how monthly debt payments are compared with gross monthly income to assess repayment capacity.

5. Reserve Bank of India — Handbook on Regulations
   RBI — Handbook on Regulations — Includes guidance concerning loan applications, appraisal, fees and disclosure of lending terms.

6. TransUnion CIBIL — CIBIL Score and Credit Report
   TransUnion CIBIL Contact and Credit Report Information — Provides official information about accessing CIBIL Scores and reports and raising disputes regarding inaccuracies.

About the Author

Ms. Smriti Barua is a renowned finance expert who specialises in personal finance, online lending, and consumer credit protection. In her position, she has gained a great deal of experience advising people and companies on prudent borrowing. Her primary objective is to help people educate themselves about online lending, thereby reducing cases of fraud.